Major categories of loans are as follows:



Loan Categories
	For the Years Ended December 31,
(in thousands)	2018			2017
Real estate:
Residential	$	407,844		$	342,684
Commercial	278,691			259,853
Construction	157,586			144,932
Commercial	122,264			108,982
Credit card	34,673			31,507
Other consumer	1,202			1,053
	1,002,260			889,011
Deferred origination fees, net	(1,992		)	(1,591		)
Allowance for loan losses	(11,308		)	(10,033		)
Loans receivable, net	$	988,960		$	877,387

The Company makes loans to customers located primarily in the Washington, D.C. metropolitan area. Although the loan portfolio is diversified, its performance will be influenced by the regional economy. The Company’s loan categories are described below.

Residential Real Estate Loans. One-to-four family mortgage loans are primarily on owner-occupied primary residences and, to a lesser extent, investor owned residences. Residential loans are originated through the commercial sales teams and Church Street Mortgage division. Residential loans also include home equity lines of credit. One-to-four family residential loans have a relatively small balance spread between many individual borrowers compared to our other loan categories. Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Investor residential real estate loans are based on 25-year terms with a balloon payment due after five years. The required minimum debt service coverage ratio is 1.15. Residential real estate loans have represented a stable and growing portion of our loan portfolio. The emphasis will continue to be on residential real estate lending.

Commercial Real Estate Loans. Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are also included in this category of loans. As of December 31, 2018, there were approximately $129.1 million of owner-occupied commercial real estate loans, representing approximately 46% of the commercial real estate portfolio. Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less. The interest rates on commercial real estate loans have initial fixed rate terms that adjust typically at 5 years and origination fees are routinely charged for services. Personal guarantees from the principal owners of the business are generally required, supported by a review of the principal owners’ personal financial statements and global debt service obligations. The properties securing the portfolio are located primarily throughout the Company’s markets and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.

Construction Loans. Construction loans are offered within the Company’s Washington, D.C. and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market through Church Street Mortgage. According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties. Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are closely monitored as well as the borrower’s trends of sales valuations as compared to underwriting valuations as part of the ongoing risk management efforts. The borrowers’ progress in construction buildout is closely monitored and the original underwriting guidelines for construction milestones and completion timelines are strictly enforced.

Commercial Business Loans. In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower. Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and personal guaranties from the borrower or other principal are generally obtained.

Credit Cards. Through the OpenSky® credit card division, credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores are provided through a fully digital and mobile platform. Substantially all of the lines of credit are secured by a noninterest bearing demand account at the Bank in an amount equal to the full credit limit of the credit card. In addition, using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis) the Bank has recently begun to offer certain customers an unsecured line in excess of their secured line of credit. Approximately $32.5 million and $29.4 million of the credit card balances were secured by savings deposits held by the Bank as of December 31, 2018 and 2017, respectively.

Other Consumer Loans. To a very limited extent and typically as an accommodation to existing customers, personal consumer loans such as term loans, car loans or boat loans are offered.

Loans acquired through acquisitions are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. In estimating the fair value of loans acquired, certain factors were considered, including the remaining lives of the acquired loans, payment history, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and the net present value of cash flows expected. Discounts on loans that were not considered impaired at acquisition were recorded as an accretable discount, which will be recognized in interest income over the terms of the related loans. For loans considered to be impaired, the difference between the contractually required payments and expected cash flows was recorded as a nonaccretable discount. The remaining nonaccretable discounts on loans acquired were $354 thousand and $601 thousand as of December 31, 2018 and 2017, respectively. Loans with nonaccretable discounts had a carrying value of $1.3 million and $1.5 million as of December 31, 2018 and 2017, respectively.

The activity in the accretable discounts on loans acquired was as follows:



Accretable Discounts on Loans Acquired
	For the Years Ended December 31,
(in thousands)	2018			2017
Accretable discount at beginning of period	$	543		$	676
Less: Accretion and payoff of loans	(105		)	(133		)
Accretable discount at end of period	$	438		$	543

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans for the years ended December 31, 2018 and 2017.



Allowance for Loan Losses
(in thousands)			Provision for Loan Losses										Allowance for Loan Losses Ending Balance Evaluated for Impairment:				Outstanding Loan Balances Evaluated for Impairment:
December 31, 2018	Beginning Balance		Provision for Loan Losses			Charge-Offs			Recoveries		Ending Balance		Individually		Collectively		Individually		Collectively
Real estate:
Residential	$	3,137	$	522		$	(121	)	$	3	$	3,541	$	—	$	3,541	$	2,120	$	405,724
Commercial	2,860		13			(22		)	152		3,003		—		3,003		1,486		277,205
Construction	1,646		447			—			—		2,093		—		2,093		—		157,586
Commercial	1,497		194			(147		)	34		1,578		262		1,316		749		121,515
Credit card	885		963			(806		)	42		1,084		—		1,084		—		34,673
Other consumer	8		1			—			—		9		—		9		—		1,202
	$	10,033	$	2,140		$	(1,096	)	$	231	$	11,308	$	262	$	11,046	$	4,355	$	997,905

December 31, 2017
Real estate:
Residential	$	2,664	$	664		$	(191	)	$	—	$	3,137	$	—	$	3,137	$	1,766	$	340,918
Commercial	2,682		375			(312		)	115		2,860		—		2,860		4,293		255,560
Construction	1,591		55			—			—		1,646		—		1,646		627		144,305
Commercial	1,174		345			(25		)	3		1,497		60		1,437		1,544		107,438
Credit card	477		1,217			(1,124		)	315		885		—		885		—		31,507
Other consumer	9		(1		)	—			—		8		—		8		—		1,053
	$	8,597	$	2,655		$	(1,652	)	$	433	$	10,033	$	60	$	9,973	$	8,230	$	880,781

Past due loans, segregated by age and class of loans, as of December 31, 2018 and 2017 were as follows:



Loans Past Due	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More days Past Due		Nonaccrual Loans

(in thousands)
December 31, 2018
Real estate:
Residential	$	1,070	$	2,081	$	3,151	$	404,693	$	407,844	$	235	$	2,207
Commercial	1,746		1,431		3,177		275,514		278,691		—		1,486
Construction	—		—		—		157,586		157,586		—		—
Commercial	612		398		1,010		121,254		122,264		—		749
Credit card	3,771		2		3,773		30,900		34,673		2		—
Other consumer	—		—		—		1,202		1,202		—		—
	$	7,199	$	3,912	$	11,111	$	991,149	$	1,002,260	$	237	$	4,442

Acquired loans included above	$	521	$	488	$	1,009	$	7,275	$	8,284	$	235	$	582

December 31, 2017
Real estate:
Residential	$	8,311	$	968	$	9,279	$	333,405	$	342,684	$	—	$	1,828
Commercial	128		333		461		259,392		259,853		—		1,648
Construction	—		280		280		144,652		144,932		280		499
Commercial	1,219		911		2,130		106,852		108,982		—		1,067
Credit card	2,982		85		3,067		28,440		31,507		85		—
Other consumer	—		—		—		1,053		1,053		—		—
	$	12,640	$	2,577	$	15,217	$	873,794	$	889,011	$	365	$	5,042

Acquired loans included above	$	208	$	635	$	843	$	9,526	$	10,368	$	—	$	1,367

Impaired loans include loans acquired on which management has recorded a nonaccretable discount. Impaired loans as of December 31, 2018 and 2017 were as follows:



Impaired Loans
	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance		Average recorded investment		Interest recognized
(in thousands)
December 31, 2018
Real estate
Residential	$	2,411	$	2,120	$	—	$	2,120	$	—	$	2,564	$	28
Commercial	1,551		1,486		—		1,486		—		1,591		—
Construction	32		—		—		—		—		140		—
Commercial	856		363		386		749		262		1,270		—
	$	4,850	$	3,969	$	386	$	4,355	$	262	$	5,565	$	28

Acquired loans included above	$	775	$	497	$	—	$	497	$	—	$	—	$	—

December 31, 2017
Real estate
Residential	$	2,329	$	1,766	$	—	$	1,766	$	—	$	1,948	$	30
Commercial	4,677		4,293		—		4,293		—		4,407		169
Construction	659		627		—		627		—		880		24
Commercial	1,824		1,178		366		1,544		60		1,600		48
	$	9,489	$	7,864	$	366	$	8,230	$	60	$	8,835	$	271

Acquired loans included above	$	2,149	$	1,366	$	—	$	1,366	$	—	$	1,553	$	1

There were $221 thousand and $503 thousand, respectively, of loans secured by one to four family residential properties in the process of foreclosure as of December 31, 2018 and December 31, 2017.

Credit quality indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge-offs, nonperforming loans, and the general economic conditions in the Company’s market.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as classified is as follows:

Special Mention

A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.

Substandard

A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management.

Doubtful

A doubtful loan has all the weaknesses inherent as a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the balances of classified loans based on the risk grade. Classified loans include Special Mention, Substandard, and Doubtful loans:



Loan Classifications
(in thousands)	Pass⁽¹⁾		Special Mention		Substandard		Doubtful		Total
December 31, 2018
Real estate:
Residential	$	405,532	$	118	$	2,194	$	—	$	407,844
Commercial	274,247		2,958		1,486		—		278,691
Construction	154,643		843		2,100		—		157,586
Commercial	117,670		3,844		750		—		122,264
Credit card	34,673		—		—		—		34,673
Other consumer	1,202		—		—		—		1,202
Total	$	987,967	$	7,763	$	6,530	$	—	$	1,002,260

December 31, 2017
Real estate:
Residential	$	340,854	$	—	$	1,830	$	—	$	342,684
Commercial	251,292		6,175		2,386		—		259,853
Construction	144,433		—		499		—		144,932
Commercial	101,868		5,730		1,384		—		108,982
Credit card	31,507		—		—		—		31,507
Other consumer	1,053		—		—		—		1,053
Total	$	871,007	$	11,905	$	6,099	$	—	$	889,011

________________________

⁽¹⁾Classification includes loans graded exceptional, very good, good, satisfactory and pass/watch

Impaired loans also include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. The status of TDRs is as follows:



Troubled Debt Restructurings
	Number of Contracts	Recorded Investment
(dollars in thousands)	Number of Contracts	Performing		Nonperforming		Total
December 31, 2018
Real estate:
Residential	3	$	—	$	145	$	145
Commercial	1	—		139		139
Total	4	$	—	$	284	$	284

Acquired loans included above	3	$	—	$	145	$	145

December 31, 2017
Real estate:
Residential	5	$	—	$	254	$	254
Commercial	1	2,709		—		2,709
Commercial	3	510		338		848
Total	9	$	3,219	$	592	$	3,811

Acquired loans included above	4	$	—	$	151	$	151

During the year ended December 31, 2018, the Company had no new modified loans that were considered TDRs, and no defaulted loans over the last twelve months. Of the four loans designated as troubled debt restructing at December 31, 2018, three loans were due to changes in interest rates and payment terms, and one loan was due to a change in interest rate, payment terms and a principal reduction. At December 31, 2017, three loans were designated as troubled debt restructuring due to payment terms and extension of maturity, four loans due to changes in interest rates and payment terms, and two loans for extensions of maturity dates. There were three restructured loans charged off in the amount of $291 thousand, and two performing restructured loans paid off for $3.2 million during the year ended December 31, 2018.

Outstanding loan commitments were as follows:



Loan Commitments
	For the Years Ended December 31,
(in thousands)	2018		2017
Unused lines of credit
Commercial	$	52,083	$	46,580
Commercial real estate	8,980		7,530
Residential real estate	12,853		7,072
Home equity	27,243		25,395
Secured credit card	29,142		30,161
Personal	126		148
Construction commitments
Residential real estate	72,424		56,463
Commercial real estate	6,358		7,350
	$	209,209	$	180,699

Commitments to originate residential loans held for sale	$	647	$	4,138

Letters of credit	$	6,216	$	6,759

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition of the contract. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee. Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, we would be required to fund the commitment.

The Company's maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments and lines of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss to be incurred by funding these loan commitments. As of December 31, 2018 and December 31, 2017 respectively, the Company had an allowance for off-balance-sheet credit risk of $1,053 thousand and $901 thousand, recorded in other liabilities on the consolidated balance sheet.

The Company makes representations and warranties that loans sold to investors meet their program's guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations.

The Company maintains a liability account for estimated reserves on off balance sheet items such as unfunded lines of credit. Activity for this accounts is as follows:



Off Balance Sheet Reserves
	For the Years Ended December 31,
(in thousands)	2018		2017
Balance at beginning of period	$	901	$	801
Add: Provision	152		100
Add: Recoveries	—		—
Less: Charge-offs	—		—
Balance at end of period	$	1,053	$	901

The Company maintains a reserve in other liabilities for potential losses on mortgage loans sold. Activity in this reserve is as follows for the periods presented:



Mortgage Loan Put-back Reserve
	For the Years Ended December 31,
(in thousands)	2018			2017
Balance at beginning of period	$	457		$	442
Add: Provision	106			115
Add: Recoveries	—			—
Less: Charge-offs	(62		)	(100		)
Balance at end of period	$	501		$	457